Between those two (E*trade vs, Fidelity), which would you recommend to a new bond investor?

folgore,

Actually, neither. Instead, I'd push them toward Zions Direct, with the following caveats.

First, what are the would-be bond investor's objectives? If they describe themselves as a “Defensive Investor” (in Graham’s sense of the term, i.e., low-effort, little-worry investing for modest returns), I truly believe they would be best served at Zions Direct if their intention is to do all of their bond investing in a single account. ZD offers a breadth of fixed-income products that exceeds anyone else’s. Their commission schedule is tolerable, and their search-engine is manageable. In other words, with very little effort, a beginning bond investor could look at what he/she needs to look at and execute without ever worrying that they might be missing out on something better somewhere else.

If that same beginner wants to accept the additional effort and risk (and reward) that moving into the “Enterprising” category requires, (again, in Graham’s sense of the term as he lays it out in his classic intro to value investing, The Intelligent Investor), then I’d also still say Zions for the first account but probably say Fidelity for the second, because as awkward and difficult as their search-engine can be to use, it does some nice, proprietary things that ZD and ET don’t, plus their commissions are going to be a bit cheaper and, even, sometimes their bond prices.

Lastly, if the beginner identifies his/her objectives as including some exposure to speculative bonds, then Fidelity gets put back to third place, because their minimum-purchase requirements tend to be larger than those at Zions or E*Trade, and it takes a big, big account (or genuine stupidity if the account is small, or truly superb research skills) to trade (i.e., ‘invest in’) junk in size. In other words, taking a reasonably-researched flier on a single of anyone’s debt isn’t going to kill anyone’s account, nor is even a basket of reasonably-researched, reasonably-diversified, specualtive singles. But if you start buying in fives and tens, you’re going to go bust, or, at best, do no better than what buying a decent junk bond fund would have done for you.

Unfortunately, the investors for whom doing bonds at E*Trade is going to work best are those who are long-time account holders and who have been grandfathered into being able to download into a spreadsheet the output of a bond scan. You would not believe how fast I can scan and then slam though thousands of bonds at E*Trade to find the very few that are worth at further look. I can attain nearly the same speed at Zions and their search-engine. But dealing with Fidelity’s search-engine is a pain in the butt. At every refresh, all parameters have to be reset, and their inventory isn’t as extensive as E*Trade’s or Zion’s.

I’m sure there are other factors I haven’t mentioned that might be even more important to you. So take my recommendations with “a grain of salt”, as they say.

Lastly, a word about current bond prices. Interest-rates for the high-quality stuff are on the rise at the same time that prices for them continue to be pushed to extremes. Ditto the prices for lower-quality credits. The current market is a mess due to two opposing factors: the Fed’s efforts to push down interest-rates and the very intended effort to push up prices on risk-assets. Things are a real mess, because bond prices don’t reflect rational supply and demand. Meanwhile, the BLS is lying their butts off about inflation, GDP, etc. (So, what else is new, right?) But the net-effect is that it has become very, very tough to pull a real-rate of return (after taxes and inflation) out of the bond market, and my inclination would be to advise beginners not even try. They’re not coming into the market with a substantial, already-established portfolio of fixed-income credits that they can hold to maturity and against which they can charge the risks that have to be accepted by buying at current prices. The better plan for them is to forget about ‘investing in bonds’ and to trade them (or derivatives based on them, which is what a bond fund is) from both sides of the market, long or short, as conditions warrant.

There is one exception to that advice. If a would-be investor intends to lose money in the sense of ‘conserving purchasing-power’ the same way one conserves energy, i.e., by using it up slowly, then he/she can buy whatever in the bond market meets their criteria for stability of nominal principal with a bone tossed toward some income from coupons. In other words, there’s plenty of decent-quality bonds that would offer a highly probable 3%-4% YTM. But why bother? Surely, they can find better things to do with their time and money.

Announcements

Foolanthropy 2014!
By working with young, first-time moms, Nurse-Family Partnership is able to truly change lives – for generations to come.

When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.

Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.